<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1996
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______ to ________
____________________
COMMISSION FILE NUMBER 0-17980
____________________
RALLY'S HAMBURGERS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 62-1210077
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
10002 Shelbyville Road, Suite 150, Louisville, Kentucky 40223
Registrant's telephone number, including area code: 502/245-8900
Indicate by check mark whether Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
CLASS - Common stock, Par value $.10 per share
OUTSTANDING AT July 31, 1996 - 15,678,335 shares
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RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<S> <C> <C> <C>
PART I. Financial Information PAGE NO.
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1995 and June 30,
1996 (Unaudited) 2
Consolidated Statements of Operations (Unaudited) for the
Quarter and Six Months Ended July 2, 1995 and June 30, 1996 3
Consolidated Statements of Cash Flows (Unaudited) for the Six
Months Ended July 2, 1995 and June 30, 1996 4
Notes to Consolidated Financial Statements (Unaudited) 5
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
PART II. Other Information
ITEM 1. Legal Proceedings 24
ITEM 4. Submission of Matters to a Vote of Security Holders 24
ITEM 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
EXHIBIT 11 Calculation of Earnings Per Share 27
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND JUNE 30, 1996
(In thousands, except shares and per share amounts)
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, JUNE 30,
1995 1996
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,811 $ 2,005
Restricted cash 683 669
Investments 4,933 -
Royalties receivable, including $483 and $295 from related parties at December 31, 1995
and June 30, 1996, respectively, net of a reserve for doubtful accounts of $922 and
$1,195 at December 31, 1995 and June 30, 1996, respectively
818 580
Accounts and other receivables, including $497 from related parties at June 30, 1996, net
of reserve for doubtful accounts of $453 and $335 at December 31, 1995 and June 30,
1996, respectively 2,131 2,046
Inventory, at lower of cost or market 1,056 948
Current portion of notes receivable, including $10 from related parties at December 31,
1995, net of a reserve for doubtful accounts of $109 and $282 at December 31, 1995 and
June 30, 1996, respectively 113 80
Prepaid expenses and other current assets 1,131 1,041
Assets held for sale 2,506 287
-------- --------
Total current assets 22,182 7,656
Assets held for sale 3,517 2,445
Property and equipment, at historical cost, less accumulated depreciation of $33,391 and
$35,784 at December 31, 1995 and June 30, 1996, respectively 78,683 73,354
Notes receivable, less current portion, including $165 from related parties at December 31,
1995, net of a reserve for doubtful accounts of $433 and $306 at December 31, 1995 and
June 30, 1996, respectively 676 393
Intangible and other assets, less accumulated amortization of $6,888 and $6,818 at
December 31, 1995 and June 30, 1996, respectively 32,334 31,079
-------- --------
Total assets $137,392 114,927
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,773 $ 6,647
Accrued liabilities 15,959 16,419
Current maturities of long-term debt and obligations under capital leases, including
$2,072 from related parties at June 30, 1996 17,544 3,970
-------- --------
Total current liabilities 42,276 27,036
Senior notes, net of discount of $768 and $516 at December 31, 1995 and June 30, 1996,
respectively 69,034 62,484
Long-term debt, less current maturities 5,749 5,139
Obligations under capital leases, less current maturities 5,631 5,603
Other liabilities 8,030 7,016
-------- --------
Total liabilities 130,720 107,278
-------- --------
Commitments and contingencies (Note 6)
Shareholders' equity:
Common stock, $.10 par value, 50,000,000 shares authorized, 15,927,000 and 15,941,000 shares
issued at December 31, 1995 and June 30, 1996, respectively 1,593 1,594
Additional paid-in capital 60,804 60,831
Less: Treasury shares, 273,000 at December 31, 1995 and June 30, 1996, respectively
(2,108) (2,108)
Retained deficit (53,617) (52,668)
-------- --------
Total shareholders' equity 6,672 7,649
-------- --------
Total liabilities and shareholders' equity $137,392 $114,927
======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
2
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RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except shares and per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ --------------------------
JULY 2, JUNE 30, JULY 2, JUNE 30,
1995 1996 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Restaurant sales $ 47,861 $ 45,771 $ 88,595 $ 86,279
Franchise revenues and fees 1,982 1,586 3,718 2,990
-------- -------- -------- --------
Total revenues 49,843 47,357 92,313 89,269
-------- -------- -------- --------
COSTS AND EXPENSES:
Restaurant cost of sales 16,127 16,064 30,081 30,865
Restaurant operating expenses, exclusive of
depreciation and amortization and other
operating expenses shown separately below 20,901 20,260 39,631 40,389
General and administrative expenses 4,466 3,917 9,012 8,000
Advertising and promotion expenses 3,571 2,067 6,373 4,915
Depreciation and amortization 3,573 2,614 7,004 5,302
Other charges - 22 - 754
-------- -------- -------- --------
Total costs and expenses 48,638 44,944 92,101 90,225
-------- -------- -------- --------
Income (loss) from operations 1,205 2,413 212 (956)
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense (2,684) (2,146) (5,275) (4,459)
Interest income 199 34 293 379
Other 96 (4) 137 (33)
-------- -------- -------- --------
Total other (expense) (2,389) (2,116) (4,845) (4,113)
-------- -------- -------- --------
Income (loss) before income taxes and
extraordinary items (1,184) 297 (4,633) (5,069)
PROVISION (BENEFIT) FOR INCOME TAXES 60 186 120 (1,496)
-------- -------- -------- --------
Income (loss) before extraordinary items (1,244) 111 (4,753) (3,573)
EXTRAORDINARY ITEMS (net of income taxes
of $1,817) - - - 4,522
-------- -------- -------- --------
Net income (loss) $ (1,244) $ 111 $ (4,753) $ 949
======== ======== ======== ========
Income (loss) per common share:
Income (loss) before extraordinary item $ (.08) $ .01 $ (.30) $ (.23)
Extraordinary item - - - .29
-------- -------- -------- --------
Net income (loss) $ (.08) $ .01 $ (.30) $ .06
======== ======== ======== ========
Weighted average shares outstanding 15,589 15,934 15,600 15,802
======== ======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these consolidated financial statements.
3
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RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 5)
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------
JULY 2, JUNE 30,
1995 1996
-------- --------
<S> <C> <C>
CASH FLOWS PROVIDED FROM (USED IN) OPERATING ACTIVITIES:
Net income (loss) $ (4,753) $ 949
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 7,004 5,302
Other charges - 754
Provision for losses on receivables 637 372
Extraordinary items, before tax expense of $1,817 - (6,339)
Other 951 706
Changes in assets and liabilities, net of effects from business
combinations:
(Increase) decrease in assets:
Receivables (675) (234)
Inventory 28 108
Prepaid expenses and other current assets 59 63
Increase (decrease) in liabilities:
Accounts payable, accrued interest and other accrued liabilities 3,255 (1,605)
Accrued income taxes 24 (22)
Other liabilities (603) (494)
-------- --------
Net cash provided by (used in) operating activities 5,927 (440)
-------- --------
CASH FLOWS PROVIDED FROM (USED IN) INVESTING ACTIVITIES:
(Increase) decrease in investments (4,953) 4,926
Notes receivable 74 318
Preopening costs (28) (32)
Capital expenditures (2,281) (718)
Proceeds from the sale of property and equipment and assets held for sale 2,021 3,712
(Increase) in other assets (507) (280)
Acquisition of businesses, net of cash acquired (1,931) -
Proceeds from the sale of a business 2,730 -
-------- --------
Net cash provided by (used in) investing activities (4,875) 7,926
-------- --------
CASH FLOWS PROVIDED FROM (USED IN) FINANCING ACTIVITIES:
Decrease in restricted cash - 14
Principal payments of debt (1,212) (2,999)
Senior Notes retirement - (11,053)
Proceeds from the issuance of common stock, net of costs of issuance 48 28
Principal payments on capital lease obligations (328) (282)
-------- --------
Net cash used in financing activities (1,492) (14,292)
-------- --------
Net decrease in cash (440) (6,806)
CASH AND CASH EQUIVALENTS, beginning of period 2,707 8,811
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 2,267 $ 2,005
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these consolidated financial statements.
4
<PAGE> 6
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular dollars in thousands, except per share amounts)
1. FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities
and Exchange Commission for interim financial information. Accordingly,
they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial
statements. Therefore, it is suggested that the accompanying financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's annual report on Form 10-K for the
fiscal year ended December 31, 1995 ("10-K"). Except as disclosed
herein, there has been no material change in the information disclosed in
the notes to the consolidated financial statements included in the 10-K.
Forward looking statements contained herein should be read in conjunction
with the cautionary statements contained in the 10-K.
The consolidated financial statements include Rally's Hamburgers, Inc.
and its wholly-owned subsidiaries, each of which is described below.
Rally's Hamburgers, Inc. and its subsidiaries are collectively referred
to herein as the context requires as "Rally's" or the "Company". All
significant intercompany accounts and transactions have been eliminated.
Rally's is one of the largest chains of double drive-thru restaurants in
the United States. At July 31, 1996, the Rally's system included 483
restaurants in 19 states, primarily in the Midwest and the Sunbelt,
comprised of 239 Company-owned and 244 franchised restaurants. The
Company's restaurants offer high quality fast food served quickly and at
everyday prices generally below the regular prices of the four largest
hamburger chains. The Company primarily serves the drive-thru and
take-out segments of the quick-service restaurant industry. The Company
opened its first restaurant in January 1985 and began offering franchises
in November 1986.
Rally's Hamburgers, Inc., Rally's of Ohio, Inc., Self Service Drive Thru,
Inc. and Hampton Roads Foods, Inc. own and operate Rally's restaurants in
various states. Additionally, Rally's Hamburgers, Inc. operates as
franchisor of the Rally's brand. Rally's Management, Inc. provides
overall corporate management of the Company's businesses. Rally's
Finance, Inc. was organized for the purpose of making loans to Rally's
franchisees to finance the acquisition of restaurant equipment and
modular buildings. RAR, Inc. was organized for the purpose of acquiring
and operating a corporate airplane and is currently inactive. The
5
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Company's wholly-owned subsidiary, ZDT Corporation, was formed to own the
Zipps brand and franchise system. MAC I was organized for the purpose of
acquiring a manufacturer of modular buildings. The manufacturing
business was sold in January 1995 (see Note 2).
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates, when actual transactions anticipated are consummated. In
addition, despite management diligence, changes in estimates do and will
continue to occur due to changes in available relevant data and
consummation of the events and transactions. The statements are prepared
on a going concern basis. Certain of the most significant estimates
include useful lives assigned to depreciable/amortizable assets, fair
value less costs to sell of long-lived assets held for sale, fair value
of long-lived assets held for use, future net occupancy costs related to
closed/disposable properties, accruals for the Company's self-insured and
high deductible insurance programs and disclosures regarding commitments
and contingencies.
In the opinion of management, the accompanying unaudited consolidated
financial statements include all adjustments considered necessary to
present fairly the Company's financial position as of June 30, 1996 and
the results of its operations for the quarter and six months ended July
2, 1995 and June 30, 1996 and cash flows for the six months ended July 2,
1995 and June 30, 1996. The results of operations for such interim
periods are not necessarily indicative of the results to be expected for
the full year.
It is the Company's policy to expense advertising costs as incurred.
Certain items have been reclassified in the accompanying consolidated
financial statements for prior periods in order to be comparable with the
classification adopted for the current period. Such reclassifications
had no effect on previously reported net income.
2. ACQUISITION AND DISPOSITION
On February 13, 1995, the Company acquired all of the shares of common
stock of Hampton Roads Foods, Inc. (a Louisiana corporation) and certain
of the assets of HRF, Inc. (a Virginia corporation), collectively
referred to as "HRF", for approximately $7.2 million, of which
approximately $2.1 million was paid in cash with the remainder to be paid
over the ensuing six years pursuant to a secured promissory note, bearing
interest at 9%. In addition, the Company assumed approximately $654,000
of notes payable and other liabilities and HRF's lease obligations,
6
<PAGE> 8
including capital lease obligations of approximately $1.3 million. HRF
owned and operated a total of ten Rally's restaurants and owned the
exclusive right to develop additional Rally's restaurants in the Hampton
Roads and Norfolk, Virginia areas. The acquisition of HRF was accounted
for as a purchase.
The total purchase price of approximately $9.1 million has been allocated
in the accompanying 1995 balance sheet as net property and equipment
(approximately $2.1 million) and as intangible and other assets
(approximately $6.7 million). The remainder of the purchase price,
approximately $319,000, was allocated to various current assets. The
intangible and other asset amounts include a noncompete (approximately
$150,000) which is being amortized over five years and reacquired
franchise and territory rights (approximately $6.6 million) which are
being amortized over 15 years.
The impact on operations of this acquisition was not significant for any
of the periods presented, and therefore, proforma amounts are not
presented giving effect to this acquisition.
On January 30, 1995, the Company sold all of the shares of common stock
of Beaman Corporation, its wholly-owned modular building subsidiary, for
approximately $3.1 million, of which approximately $2.7 million was paid
in cash, and the remainder will be paid pursuant to a non-interest
bearing, unsecured promissory note with equal payments due on January 30,
1997 and 1998.
3. RESTRICTED CASH
Restricted cash consists primarily of a $600,000 restricted deposit held
as a compensating balance for daily Automated Clearing House ("ACH")
transactions.
4. INVESTMENTS
Excess funds have been invested in U.S. Treasury and investment grade
corporate debt securities. These securities are deemed as
"available-for-sale" under SFAS 115, "Accounting for Certain Investments
in Debt and Equity Securities" and are reported at fair value.
Unrealized holding gains and losses, excluding those losses considered to
be other than temporary, are reported as a net amount in a separate
component of shareholders' equity. There were no unrealized holding
gains or losses at December 31, 1995 and June 30, 1996. Provisions for
declines in market value are made for losses considered to be other than
temporary. No such provision was necessary for any period presented.
The market value of the portfolio was determined based on quoted market
prices for these investments. Realized gains or losses from the sale of
investments are based on the specific identification method.
7
<PAGE> 9
There were no investments at June 30, 1996. The carrying value and
market value of investments at December 31, 1995 were as follows:
<TABLE>
<CAPTION>
GROSS GAINS
UNREALIZED UNREALIZED
CARRYING HOLDING HOLDING MARKET
VALUE GAINS LOSSES VALUE
-------- -------------- ----------------- -------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
United States government and its
agencies $4,933 $ - $ - $4,933
====== ============== ================== ======
</TABLE>
The proceeds from the sale of investments and related gross gains and
losses for the quarter and six months ended July 2, 1995 and June 30,
1996 were as follows:
<TABLE>
<CAPTION>
QUARTERS ENDED SIX MONTHS ENDED
---------------------------- --------------------------
JULY 2, JUNE 30, JULY 2, JUNE 30,
1995 1996 1995 1996
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
Proceeds from the sale of
investments $4,124 $ - $5,604 $4,933
Gross gains realized 49 - 49 -
Gross losses realized - - - -
</TABLE>
5. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JULY 2, JUNE 30,
1995 1996
------ -------
<S> <C> <C>
Interest paid (net of amount capitalized) $5,275 $4,550
Income taxes paid 20 342
Capital lease obligations incurred 1,263 111
</TABLE>
Interest incurred during the construction of restaurants is capitalized
as a component of the cost of the restaurants and is amortized on a
straight-line basis over the estimated useful lives of the restaurants.
The amount of interest capitalized in all quarters was insignificant.
8
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The purchase of HRF, described in Note 2, was recorded as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------
JULY 2, 1995
----------------
<S> <C>
Fair value of assets acquired $ 9,133
Cash paid (2,125)
-------
Liabilities assumed $ 7,008
=======
</TABLE>
As a result of the sale of Beaman, discussed in Note 2, the Company
recorded a note receivable of approximately $347,000, discounted at
12.5%. As a result of the repurchase of Senior Notes, discussed in Note
9, the Company recorded a $4.1 million short-term note payable to GIANT.
These non-cash transactions have been excluded from the consolidated
statement of cash flows.
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments with an original maturity of three months
or less at the date of purchase to be cash equivalents.
6. COMMITMENTS AND CONTINGENCIES
Litigation
In January and February 1994, two putative class action lawsuits were
filed, purportedly on behalf of the stockholders of Rally's in the United
States District Court for the Western District of Kentucky, against
Rally's, Burt Sugarman and GIANT and certain of Rally's present and
former officers and directors and its auditors. The complaints allege
defendants violated the Securities Exchange Act of 1934, among other
claims, by issuing inaccurate public statements about the Company in
order to arbitrarily inflate the price of its common stock and seek
unspecified damages. On April 15, 1994, Rally's filed a motion to
dismiss and a motion to strike. On April 5, 1995, the Court struck
certain provisions of the complaint but otherwise denied Rally's motion
to dismiss. In addition, the Court denied plaintiffs' motion for class
certification; the plaintiffs renewed this motion, and despite opposition
by the defendants, the Court granted such motion for class certification
on April 16, 1996. In October 1995, the plaintiffs filed a motion to
disqualify Christensen, White, Miller, Fink, Jacobs, Glaser, Shapiro, LLP
("Christensen, White") as counsel for defendants based on a purported
conflict of interest allegedly arising from the representation of
multiple defendants as well as Ms. Glaser's position as both a director
of Rally's and a partner in Christensen, White. Defendants filed an
opposition to the motion. That motion is currently pending. Management
is unable to predict the outcome of this matter at the present time or
whether or not certain available insurance coverages will apply. The
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defendants deny all wrongdoing and intend to defend themselves vigorously
in this matter. Because these matters are in a preliminary stage, the
Company is unable to determine whether a resolution adverse to the
Company will have a material effect on its results of operations or
financial condition. Accordingly, no provisions for any liabilities that
may result upon adjudication have been made in the accompanying financial
statements.
In July 1994, the Company entered into an agreement with Red Line
Burgers, Inc. ("Red Line") whereby Red Line leased from the Company all
of its assets being operated as Rally's restaurants in Houston, Texas.
Additionally, the agreement called for Red Line to convert Red Line's
eight competing units in the Houston market to the Rally's brand. Red
Line failed to make certain lease payments and on June 20, 1995, the
Company filed an action in the United States District Court for the
Southern District of Texas, Galveston Division, seeking recovery of
damages from Red Line for its breach of the leases and subleases entered
into with the Company. The action alleges that Red Line also committed
events of default under the terms of all of its Franchise Agreements with
the Company. As a result of such defaults, the Company terminated such
Franchise Agreements, and on August 3, 1995, the Company filed suit in
the United States District Court, Western District of Kentucky, alleging
breach of contract due to Red Line's failure to pay royalties and other
payments required by the Franchise Agreements and its failure to pay
approximately $400,000 plus interest owed on certain promissory notes
issued to the Company in lieu of such payments. The Company also seeks
accountability for $660,000 in conversion costs paid by the Company for
conversion of Red Line's Houston restaurants. Subsequent to the
commencement of the foregoing actions, Red Line filed for reorganization
under Chapter 11 of the United States Bankruptcy Code. In connection
with such proceedings, the Company's actions against Red Line have been
stayed.
In February 1996, Harbor Finance Partners ("Harbor") commenced a
derivative action, purportedly on behalf of Rally's against GIANT and
certain of Rally's officers and directors before the Delaware Chancery
Courts. Harbor named Rally's as a nominal defendant. Harbor claims that
the directors and officers of Rally's, along with GIANT, breached their
fiduciary duties to the public stockholders of Rally's by causing Rally's
to repurchase from GIANT certain Rally's Senior Notes at an inflated
price. Harbor seeks unspecified damages, along with rescission of the
repurchase transaction. All defendants have moved to dismiss the action.
Management does not believe that this litigation will have a material
effect on the Company's results of operations or financial condition.
The Company is involved in other litigation matters incidental to its
business. With respect to such other suits, management does not believe
the litigation in which it is involved will have a material effect upon
its results of operation or financial condition.
10
<PAGE> 12
Other Commitments
The Company is contingently liable on certain franchisee lease/loan
commitments totaling approximately $400,000.
The Company, from time to time, negotiates purchase contracts for certain
items used in its restaurants in the normal course of business. Although
some of these contracts contain minimum purchase quantities, such
quantities do not exceed expected usage over the term of such agreements.
7. ASSETS HELD FOR SALE
Assets held for sale include land and modular buildings idled by
slowdowns in the Company's expansion plans and land associated with the
closure of stores. The Company has recorded significant charges
resulting from restructurings, other restaurant closings and taken
certain other charges more fully discussed in the 10-K.
8. IMPAIRMENT OF LONG-LIVED ASSETS
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long- Lived Assets and Long-Lived
Assets to Be Disposed of" (SFAS 121), at the beginning of the fourth
quarter, 1995. This Statement establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles and
goodwill related to those assets to be held and used, and for long-lived
assets and certain identifiable intangibles to be disposed of. SFAS 121
requires that impairment for long-lived assets and identifiable
intangibles to be held and used, if any, be based on the fair value of
the assets. Long-Lived assets and certain identifiable intangibles to be
disposed of are to be reported at the lower of carrying amount or fair
value less cost to sell. For purposes of applying this Statement, the
Company determines fair value utilizing the present value of expected
future cash flows using a discount rate commensurate with the risks
involved.
Long-lived assets considered for impairment under SFAS 121 are required
to be grouped at the "lowest level for which there are identifiable cash
flows that are largely independent of the cash flows of other groups."
The Company believes the most correct application of this standard is
obtained by examining individual restaurants where circumstances indicate
that an impairment issue may exist. In addition, if an asset being
tested for recoverability was acquired in a business combination
accounted for using the purchase method, the goodwill that arose in that
transaction is included as part of the asset being evaluated and in
determining the amount of any impairment.
During the first quarter of 1996, two additional restaurants, due to
their continued poor operating performance, were determined to be
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impaired, resulting in charges of approximately $754,000 reflected in the
caption, "Other Charges." As required by the Standard, the Company will
continue to periodically review its assets for impairment where
circumstances indicate that such impairment may exist.
9. REPURCHASE OF SENIOR NOTES
On January 29, 1996, the Company repurchased, in two transactions, at a
price of $678.75 per $1,000 principal amount, $22 million face value of
its 9 7/8% Senior Notes due in the year 2000 from GIANT GROUP, LTD.
("GIANT"). The price paid in each transaction represented the market
closing price on January 26, 1996. The first transaction involved the
repurchase of $16 million face value of the Notes for $11.1 million in
cash. The second transaction involved the purchase of $6 million face
value of Notes in exchange for a $4.1 million short-term note, due in
three installments of principal and interest issued by Rally's. The
Company has made payments totaling $2.1 million, together with accrued
interest thereon, year to date on this short-term note. This note bears
interest at the highest publicly announced reference rate of interest
maintained by a large banking institution for commercial loans of
short-term maturities to its most credit-worthy large corporate
borrowers. The repurchase resulted in an extraordinary gain, net of tax,
of $4.5 million or $.29 per share. The remaining outstanding Notes are
publicly traded and at June 30, 1996 had a market value of $50.4 million
based on the quoted market price for such notes.
The purchases were approved by a majority of the independent Directors of
the Company. Prior to the purchases, the Company's independent Directors
had received an opinion as to the fairness of the transactions, from a
financial point of view, from an investment banking firm of national
standing.
These purchases reduced total interest expense by approximately $329,000
for the first quarter of 1996, and approximately $513,000 for the second
quarter of 1996, net of interest expense incurred on the short-term note
discussed above. Such reduction is expected to be approximately $1.9
million for the full year 1996, net of interest expense incurred on the
short-term note discussed above.
10. GIANT GROUP, LTD. CREDIT FACILITY AND LETTERS OF CREDIT
In early February 1996, GIANT entered into a one-year credit facility
with the Company. Such credit facility is evidenced by a note payable to
GIANT for up to $2 million. Any monies advanced under said note
agreement shall bear interest at the highest publicly announced reference
rate of interest maintained by a large banking institution for commercial
loans of short-term maturities to its most credit-worthy large corporate
borrowers plus two and one-half percent. Interest is payable monthly.
The facility is renewable for one or more years at the discretion of
GIANT. GIANT is not obligated to make any advance under this agreement.
12
<PAGE> 14
Terms of any specific advance under this facility are subject to an
agreement on specific terms at the date of the advance. At June 30,
1996, there were no outstanding amounts under this facility.
In addition, GIANT has issued certain irrevocable letters of credit to
secure the obligation of the Company under its large deductible workers'
compensation insurance program and to secure certain surety bonds
previously issued by the Company. In total, at the end of the second
quarter 1996, such letters of credit are approximately $800,000. Such
letters of credit replaced similar letters of credit previously issued by
the Company which had been secured by certificates of deposit. Such
certificates have been liquidated to improve the overall liquidity of the
Company.
11. SUBSEQUENT EVENTS
West Coast Operating Agreement
On July 1, 1996, the Company entered into a ten-year Operating Agreement
with Carl Karcher Enterprises, Inc., a subsidiary of CKE Restaurants,
Inc. (collectively referred to as "CKE"). CKE is the operator of the
Carl's Jr. restaurant chain. Pursuant to the agreement, 28 Rally's
owned restaurants located in California and Arizona will be operated by
CKE. Such agreement is cancelable after an initial five-year period, at
the discretion of CKE. A portion of these restaurants, at the discretion
of CKE, will be converted to the Carl's Jr. format. The agreement was
approved by a majority of the independent Directors of the Company.
Prior to the agreement, the Company's independent Directors had received
an opinion as to the fairness of the agreement, from a financial point of
view, from an investment banking firm of national standing.
Under the terms of the Operating Agreement, CKE will be responsible for
conversion costs associated with transforming the restaurants to the
Carl's Jr. format, as well as the operating expenses of all the
restaurants. Rally's will retain ownership of all 28 restaurants and
will be entitled to receive a percentage of gross revenues generated by
each restaurant. In subsequent periods, the Company's revenues will be
reduced by the absence of the restaurants' sales, somewhat offset by the
fee which will be paid to the Company by CKE. For the first six months
of the current year, the restaurants covered by this Operating Agreement
had sales of approximately $10.5 million. The Company anticipates that
the agreement will positively contribute to both net income and cash
flow. While the overall impact of the agreement is not expected to be
material to the financial statements, it will allow management to
concentrate its efforts in more fully developed Rally's markets. The
agreement will also allow the Company to take advantage of any
improvements in restaurant operations attained by CKE by implementing
these improvements in Company stores. In the event of a sale by Rally's
13
<PAGE> 15
of any of the 28 restaurants, Rally's and CKE would share in the proceeds
based upon the relative value of their respective capital investments in
such restaurant.
Shareholder Rights Offering
The Company is distributing to holders of record of shares of its Common
Stock, as of the close of business on July 31, 1996, transferable
subscription rights ("Right(s)") to purchase Units consisting of one
share of Common Stock and one Warrant to purchase an additional share of
Common Stock. Stockholders will receive one Right for each share of
Common Stock held on the Record Date. For each 4.5 Rights held, a holder
will have the right to purchase one Unit for $3.00 each. Each Warrant
may be exercised to acquire an additional share of Common Stock at an
exercise price of $3.00 per share and expires four years from the date of
issuance. If fully subscribed, this offering will generate over $10
million in gross proceeds and an additional $10 million, if the related
Warrants are exercised. GIANT, Fidelity National Financial, Inc.
("Fidelity") and CKE, which are the owners of 4,312,063, 767,807 and
2,350,432 shares of Common Stock, respectively, have committed to
exercise, or cause to be exercised, their rights related to shares held
at the record date. The net proceeds of the Rights Offering will be used
for new store construction, refurbishment of some existing restaurants
and for other general corporate purposes, including possibly reducing
outstanding indebtedness. No assurance can be given that the Rights
Offering will be fully subscribed. The Company expects to finalize the
Rights Offering in the third quarter, 1996.
Authorization of Preferred Stock
At the Company's annual meeting of stockholders held on July 10, 1996,
stockholders authorized 5,000,000 shares of Preferred Stock, $.10 par
value per share. As of July 31, 1996, no shares of Preferred Stock were
outstanding and the Company has no present plans or commitments to issue
any of the Preferred Stock.
14
<PAGE> 16
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Company reported net income of $111,000 or $.01 per share for the second
quarter of 1996 compared with a loss of $1.2 million or $.08 per share for the
same period of the prior year. Total revenues decreased from $49.8 million in
the second quarter of the prior year to $47.4 million in the second quarter of
the current year. This 5% revenue decrease resulted primarily from a
year-over-year decrease in the number of systemwide units operating during the
period, a decline of 1% in Company same store sales for the quarter and lower
royalties from franchisees.
For the six months ended June 30, 1996, the Company reported net income of
$949,000 or $.06 per share compared with a loss of $4.8 million or $.30 per
share for the prior year period. Total revenues decreased 3% to $89.3 million
in 1996 compared with $92.3 million in 1995. This decrease for the six-month
period is primarily due to a lower number of units in operation for the period
and a franchised same store sales decline of 6%.
The second quarter of 1996 is the Company's first profitable quarter, excluding
extraordinary gains, since the second quarter of 1993. The year-over-year
improvement in results for the quarter and for the first half of the year is
primarily attributable to the closure of poor performing stores in late 1995
and early 1996, the ongoing depreciation impact related to asset impairment
writedowns, lower general and administrative expenses, reduced interest
expense, lower advertising expenses and the initial impact of cost reduction
strategies aimed at reducing food, paper and labor costs.
The Company closed 17 poor performing restaurants in the fourth quarter, 1995
and in the first quarter, 1996 pursuant to its restructuring plan more fully
discussed in its 10-K for the 1995 fiscal year. These closures favorably
impacted the Company's 1996 results of operations. In the first six months of
the prior year, these closed restaurants lost $618,000 before any overhead,
interest expense or income taxes.
Previously recorded asset impairment writedowns accounted for a majority of the
decrease in depreciation and amortization. See Note 8 to the accompanying
consolidated financial statements.
The Company's general and administrative expenses have been reduced through
lower bad debt and other project charges, as well as cost control measures,
including staff reductions.
On January 29, 1996, the Company repurchased $22.0 million face value of its 9
7/8% Senior Notes for $11.1 million in cash and a $4.1 million short-term note.
The repurchase resulted in an extraordinary gain, net of tax, of $4.5 million.
In addition to the extraordinary gain, the repurchase had two significant
positive impacts on the Company. First, the repurchase decreased
15
<PAGE> 17
the Company's annual interest expense by approximately $2.0 million. Second,
the repurchase reduced the Company's 1999 33 1/3% sinking fund indenture
requirement to approximately $6 million, from $28 million.
Late in the second quarter, the Company initiated specific cost reduction
actions, including changes in its overall procurement program and in staffing
levels and labor deployment in the stores. Such changes included renegotiating
contracts, selecting alternative vendors, making low risk specification changes
and selectively closing the passenger- side drive-thru lanes of certain
restaurants during non-peak times. Management believes these initiatives began
to favorably impact results late in the second quarter. Such changes are
expected to impact food, paper and labor costs in the third quarter and beyond
although no assurance can be given with respect thereto. The Company will
continue its efforts to further reduce such costs into the future.
In July 1996, the Company appointed a new advertising agency, Mendelsohn-Zien,
in an effort to improve same store sales growth. Mendelsohn-Zien is also the
ad agency for the Carl's Jr. ("Carl's") chain and has developed successful
advertising for Carl's resulting in positive same stores sales growth for them.
Although no assurance can be given that the Company will experience the same
sales growth, management believes that improved advertising programs in
conjunction with a more clearly defined brand strategy for the Company will
positively effect sales.
During the second quarter of 1996, the Company established a strategic
partnership with California based CKE Restaurants, Inc., a significant
shareholder of the Company. The Company anticipates that the relationship will
provide significant ongoing synergies which can significantly benefit both
organizations' operations, procurement, marketing and other efforts. The first
major step in this partnership was the implementation of a ten-year operating
agreement whereby CKE assumes operational control of the 28 Company-owned
stores in California and Arizona, beginning July 1, 1996. See Note 11 for
further discussions of the Operating Agreement.
The Company's overall liquidity is expected to be favorably impacted by the
Shareholder Rights Offering expected to be completed in the third quarter,
1996. If fully subscribed, the offering is expected to generate gross proceeds
of over $10 million and an additional $10 million in new capital if the related
common stock warrants are eventually exercised over their four-year life. The
anticipated additional cash flows generated from the offering will allow the
Company to modestly accelerate new store development as well as fund other
important initiatives. See Note 11 for further discussion of the Rights
Offering.
The Company opened two units and closed one unit during the quarter. Franchise
operators opened five units during the quarter and closed three units. For the
full year, the Company expects to open seven units. The Company also
anticipates several additional franchised new store openings over the balance
of the year.
16
<PAGE> 18
Results of Operations
Rally's revenues are derived primarily from Company-owned restaurant sales and
royalty fees from franchisees. The Company also receives revenues from the
award of exclusive rights to develop Rally's restaurants in certain geographic
areas (area development fees) and the award of licenses to use the Rally's
brand and confidential operating system (franchise fees). Systemwide sales
consist of aggregate revenues of Company-owned and franchised restaurants. In
the future, the Company will receive revenues resulting from its agreement with
CKE, which is more fully discussed in Note 11 to the accompanying consolidated
financial statements. Restaurant cost of sales, restaurant operating expenses,
depreciation and amortization, and advertising and promotion relate directly to
Company-owned restaurants. General and administrative expenses relate to both
Company-owned restaurants and franchise operations.
17
<PAGE> 19
The table below sets forth the percentage relationship to total revenues,
unless otherwise indicated, of certain items included in the Company's
consolidated statements of operations and operating data for the periods
indicated:
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
-------------------------- -------------------------
JULY 2, JUNE 30, JULY 2, JUNE 30,
1995 1996 1995 1996
------- ------- ------ -------
<S> <C> <C> <C> <C>
Revenues
Restaurant sales 96.0% 96.7% 96.0% 96.7%
Franchise revenues and fees 4.0 3.3 4.0 3.3
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Costs and expenses
Restaurant cost of sales (1) 33.7% 35.1% 34.0% 35.8%
Restaurant operating expenses (1) 43.7 44.3 44.7 46.8
General and administrative expenses 9.0 8.3 9.8 9.0
Advertising and promotion
expenses (1) 7.5 4.5 7.2 5.7
Depreciation and amortization (1) 7.5 5.7 7.9 6.2
Other charges - .1 - .8
Income (loss) from operations 2.4 5.1 .2 (1.1)
Total other (expense) (4.8) (4.5) (5.2) (4.6)
Net income (loss) before income taxes and
extraordinary items (2.4)% .6% (5.0)% (5.7)%
===== ===== ===== =====
Number of restaurants:
Restaurants open at the beginning of period 538 482 542 481
----- ----- ----- -----
Company restaurants opened (closed or
transferred), net during period - 1 4 -
Franchised restaurants opened (closed or
transferred), net during period (12) 2 (20) 4
----- ----- ----- -----
Total restaurants opened (closed or
transferred), net during period (12) 3 (16) 4
----- ----- ----- -----
Total restaurants open at end of period 526 485 526 485
===== ===== ===== =====
</TABLE>
(1) As a percentage of restaurant sales.
18
<PAGE> 20
Three Months Ended July 2, 1995 Compared with Three Months Ended June 30, 1996.
Systemwide sales decreased 11% to $86.3 million for the quarter compared with
$96.5 million a year ago. This decrease is attributable to 8% or 41 fewer
restaurants being in operation at the end of the second quarter and to same
store sales declines of 5% systemwide.
Total Company revenue decreased 5% to $47.4 million for the quarter compared
with $49.8 million a year ago. Company- owned restaurant sales decreased $2.1
million to $45.8 million due to fewer Company units in operation and to a 1%
decline in same store sales during the quarter. Franchise revenues and fees
decreased by 20% in the second quarter primarily because 26 fewer franchised
units were in operation at the end of the quarter and franchise same store
sales declined by approximately 9%. During the quarter, the Company opened two
units and closed one unit while franchisees opened five units and closed three
units.
Restaurant cost of sales, as a percentage of sales, increased to 35.1% for the
second quarter compared with 33.7% for the comparable quarter of the prior
year. The increase in food cost resulted primarily from the shift of product
mix sold, reflecting the impact of a larger percent of Big Buford TM Sandwich
sales in the second quarter of 1996 compared to the same quarter 1995. While
this product carries a significantly higher dollar profit per unit, it does
carry a higher food cost percentage than did the products formerly comprising
its share of the total product mix. The Company has implemented specific cost
reduction strategies in the food and paper area by renegotiating contracts,
selecting alternative vendors and by selectively changing some product and
packaging specifications.
Restaurant operating expenses were 44.3% of sales compared with 43.7% for the
comparable quarter of the prior year. Increased labor costs were due primarily
to the implementation of the new service manager compensation plan in the first
quarter of 1996. The Company has identified and implemented specific changes
in staffing levels and labor deployment in certain stores, which are yielding
savings in management and crew labor, as well as recent changes in the service
manager compensation plan designed to tie manager compensation much more
closely to improved profitability. These cost reduction actions should
favorably influence ongoing operating expense performance.
General and administrative expenses in the second quarter of 1996, on both a
dollar and percentage of sales basis, were lower than 1995. This decrease is
caused primarily by lower levels of bad debt and other project charges, and by
reductions and vacancies in the corporate staff, partially offset by higher
legal fees.
19
<PAGE> 21
Advertising expenses decreased approximately $1.5 million in the second quarter
of 1996 compared to the same quarter of 1995 due primarily to decreases in
levels of radio advertising, outdoor advertising and local store marketing,
partially offset by an increase in television spending.
Depreciation and amortization decreased approximately $960,000 in the second
quarter of 1996 compared to the same quarter 1995. This decrease is primarily
due to asset writedowns associated with the adoption of SFAS 121 at the
beginning of the fourth quarter, 1995 and to a decrease in the number of
properties in operation.
Interest expense decreased 20% in the second quarter of 1996 to $2.1 million as
compared to $2.7 million in 1995 primarily due to the early extinguishment of
debt, as previously discussed. See "Liquidity and Capital Resources" and Note
9 to the accompanying consolidated financial statements, for further
discussion.
Interest income was lower in the second quarter of 1996 compared with the
comparable quarter a year ago due to decreases in the average daily invested
amounts.
The Company's decrease in Other is due primarily to lower gains/losses on
investments and to the storage costs related to excess modular buildings.
The Company's tax provision relates primarily to provisions for state taxes
expected to be currently payable.
Six Months Ended July 2, 1995 Compared with Six Months Ended June 30, 1996.
Systemwide sales declined 9% for the first six months of 1996 to $162.9 million
compared with $179.1 million a year ago. This decrease is attributable to 8%
or 41 fewer restaurants being in operation at the end of the second quarter and
to same store sales declines of 3% systemwide.
Total Company revenue decreased 3% to $89.3 million in 1996 compared with $92.3
million in 1995. Company-owned restaurant sales decreased 3% to $86.3 million
primarily due to fewer Company units in operation, as comparable same store
sales were essentially flat. Franchise revenues and fees decreased by 20% for
the year primarily because there were 26 fewer franchised units in operation at
the end of the second quarter and franchise same store sales declined by 6%.
For the year to date, the Company opened two units and closed two units while
franchisees opened eleven units and closed seven units.
Restaurant cost of sales, as a percentage of sales, increased to 35.8% for the
first half of the year compared with 34.0% for the first half of the prior
year. This increase was driven by higher food and paper cost as a
20
<PAGE> 22
percentage of sales. See the quarterly comparison for discussion of the shift
in product mix and the impact of cost reduction strategies the Company has
implemented in this area.
Restaurant operating expenses expressed as a percentage of sales increased to
46.8% for the first half of 1996 compared with 44.7% for 1995. This increase
as a percentage of sales is primarily attributable to higher labor costs and
repairs and maintenance costs. Increased labor costs were due primarily to the
implementation of the new service manager compensation plan in the first
quarter of 1996. See the quarterly comparison for discussion of cost reduction
strategies in the labor area. Repair and maintenance costs increased primarily
because of additional costs incurred in the total refurbishment of two existing
stores, the relocation of surplus modular buildings and equipment, and the
maintenance of the store base.
General and administrative expenses on a year-to-date basis are lower than
1995, on both a dollar and a percentage of sales basis. See earlier discussion
above as the decrease is consistent with the quarterly results.
Advertising expenses were lower on a year-to-date basis due to spending level
decreases in the second quarter, as previously discussed.
Depreciation and amortization on a year-to-date basis decreased to $5.3
million as compared to $7.0 million for the same period in the prior year. See
earlier discussion above as the decrease is consistent with the quarterly
results.
Interest expense decreased 15% on a year-to-date basis to $4.5 million as
compared to $5.3 million for the same period in the prior year, consistent with
the quarterly results.
Interest income was higher in the six months ended June 30, 1996 due primarily
to interest earned on certain cash deposits related to the Company's large
deductible insurance programs included in the balance sheet caption,
"Intangible and other assets."
See earlier discussion of Other as the year-to-date trend is consistent with
quarterly results.
The Company's net provision for income taxes year-to-date is $320,000 and
relates to state taxes expected to be currently payable.
Liquidity and Capital Resources
The Company's cash flow used in operating activities was approximately $440,000
for the first half of 1996 compared with cash flow provided by operating
activities of approximately $5.9 million for the same period in the prior year.
This decrease resulted primarily from unfavorable changes in
21
<PAGE> 23
working capital which more than offset higher net income in 1996. The change
in working capital related primarily to differences in the timing of accounts
payable.
Capital expenditures of approximately $718,000 for the first half of 1996 were
funded primarily through sales of surplus properties and existing cash
balances. Approximately $376,000 of these expenditures were for the
construction of new stores. Two of these stores opened in the first half of
1996 and two stores were under construction at June 30, 1996. The Company
expects to open a total of seven units this year. The Company spent
approximately $215,000 for the replacement of three existing store buildings,
constructed in the late eighties, with surplus modular buildings. Such actions
were taken to provide increased operational flexibility and to reduce
maintenance costs in these units given the low cash outflow necessary to
utilize certain of the surplus modular buildings. Remaining capital
expenditures were primarily for the purchase and installation of certain
replacement equipment. Full year capital expenditures are expected to be
approximately $2 million to $4 million, inclusive of replacement capital.
In January 1996, the Company repurchased, in two transactions, $22 million face
value of its 9 7/8% Senior Notes due in the year 2000. The Notes were
purchased from GIANT GROUP, LTD. ("GIANT") at a price of $678.75 per $1,000
principal amount, representing the market closing price on the last business
day prior to the repurchase date. The first transaction involved the
repurchase of $16 million face value of the Notes for $11.1 million in cash.
The second transaction involved the purchase of $6 million face value of the
Notes in exchange for a $4.1 million short-term note due in three installments
of principal and interest, bearing interest at prime. The Company has made
payments totaling $2.1 million together with accrued interest thereon,
year-to-date on this short-term note. Prior to the Senior Notes repurchases,
the Company's Board of Directors had received an independent opinion from an
investment banking firm as to the fairness of the transactions. As a result of
these debt repurchases, the annualized ongoing interest payments on the Senior
Notes have been reduced by approximately $2.2 million per year to approximately
$6.2 million.
Principal payments of debt and capital leases totaled approximately $15.9
million during the first six months of 1996, inclusive of the $11.1 million and
the $2.1 million related to the Senior Notes repurchased, as discussed above.
The Company is required to make a mandatory sinking fund payment on June 15,
1999 calculated to retire 33 1/3% in aggregate principal amount of the Senior
Notes issued with the balance maturing on June 15, 2000. The repurchase
discussed above reduces such sinking fund requirement to approximately $6
million from $28 million.
In February 1996, the Company obtained a one-year credit facility from GIANT,
evidenced by a note payable for up to $2 million. The facility is renewable
for one or more years at the discretion of GIANT. GIANT is not obligated to
make any advance under this agreement. As of June 30, 1996, there were no
outstanding amounts under this facility. The note's interest rate fluctuates
22
<PAGE> 24
with the highest publicly announced reference rate of interest maintained by a
large banking institution for commercial loans of short-term maturities to its
most credit-worthy large corporate borrowers plus two and one-half percent.
The Company is actively marketing the assets included in the caption "Assets
held for sale" in the accompanying consolidated balance sheet and expects
realization in cash over the next 12 to 24 months, although actual timing of
such cash flows cannot be predicted. The assets contained in this caption are
recorded at management's current estimate of fair market value less costs to
sell. There can be no assurances that these values will be realized.
Approximately $3.5 million was generated during the first half of 1996 from the
sale of land and buildings. The proceeds of the future sale of a property will
be required to liquidate the related remaining outstanding balances of certain
secured indebtedness totalling approximately $200,000. The Company is in
default of certain covenants of this indebtedness and has classified it in
current liabilities in the accompanying balance sheets. The debt instruments
are not accelerated by the defaults although proceeds of the secured assets
must be applied against the debt.
During the first half of the year, the Company received funds ($90,000) on land
contracts covering four fee properties which are the subject of an aggregate
amount of $1.8 million of sale/leaseback financing. The interest rate on such
facility is approximately 12.5%. The holder of such contracts has been unable
to complete contractual requirements to fund such transactions. The Company
continues to consider alternatives offered by the holder including substitution
of a different buyer or extension of time available to fund the agreements.
The Company expects cash flows to be favorably impacted by the Rights Offering
it expects to complete in the third quarter, 1996. The additional capital will
improve the Company's liquidity and strengthen the Company's balance sheet. It
will also provide funds for new store development and other important
initiatives. See Note 11 for further discussion of the Shareholder Rights
Offering.
Until this quarter, the Company had not reported a profit, exclusive of
extraordinary gains, since the second quarter of 1993. Although the Company
believes existing cash balances, cash flow from operations, cash flow from the
sale of assets and available tax refunds should be sufficient to fund its
operations and obligations for 1996, the ability of the Company to satisfy its
obligations under the Senior Notes will be dependent on the Company, among
other factors, successfully increasing revenues and profits.
23
<PAGE> 25
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings - See Note 6 to the financial statements.
ITEM 4 Submission of Matters to a Vote of Security Holders
The Company's annual meeting of stockholders was held on July 10,
1996. At the meeting, stockholders elected a board of eight
directors, ratified the authorization of Preferred Stock and
non-voting Common Stock, ratified a proposal to amend the
Company's 1990 Stock Option Plan, ratified a proposal to adopt the
Company's amended 1995 Stock Option Plan for Non-Employee
Directors and ratified the appointment of Arthur Andersen LLP as
the Company's independent auditors.
Results of the voting in connection with each item were as
follows:
<TABLE>
<CAPTION>
Election of Directors For Withheld
--------------------- ---------- --------
<S> <C> <C>
Terry N. Christensen 13,052,089 123,256
Willie D. Davis 13,050,989 124,356
Donald E. Doyle 13,052,064 123,281
William P. Foley II 13,052,084 123,261
David Gotterer 13,050,689 124,656
Jeffrey Rosenthal 13,050,986 124,356
Burt Sugarman 13,036,232 139,113
C. Thomas Thompson 13,051,089 124,256
</TABLE>
<TABLE>
<CAPTION>
For Against Abstain
---------- ------- --------
<S> <C> <C> <C>
Authorization of Preferred Stock and Non-
voting Common Stock 8,132,572 340,211 44,084
Amend 1990 Stock Option Plan 12,470,861 332,802 60,878
Adopt 1995 Non-employee Director Plan 8,224,584 384,411 53,767
Ratification of accountants 13,084,121 59,554 31,670
</TABLE>
24
<PAGE> 26
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -------------------------------------------------------------------------------
<S> <C>
4.5 Other Debt Instruments - Copies of debt instruments for which the related debt
is less than 10% of the Company's total assets will be furnished to the
Commission upon request.
*10.14 Employment Agreement between the Company and Donald E. Doyle dated March 1,
1996.
11 Calculation of Earnings Per Share.
27 Financial Data Schedule (for SEC use only)
</TABLE>
(b) Reports on Form 8-K:
May 3, 1996
July 24, 1996
* Compensatory plan required to be filed as an exhibit pursuant to Item 6a of
Form 10-Q.
25
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RALLY'S HAMBURGERS, INC.
Date: August 12, 1996 By: /s/ Donald E. Doyle
----------------------------------------
Donald E. Doyle
President and Chief Executive Officer
Date: August 12, 1996 By: /s/ Michael E. Foss
-----------------------------------------
Michael E. Foss
Senior Vice President and Chief Financial
Officer
(Principal Financial and Accounting Officer)
26
<PAGE> 1
Exhibit 10.14
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into this
1st day of March 1996, by and between RALLY'S HAMBURGERS, INC., a Delaware
corporation (the "Company"), and Donald E. Doyle ("Executive").
RECITALS:
The Company desires to employ Executive to serve as the Company's
President and Chief Executive Officer and to secure the Company the benefit of
Executive's experience, efforts and abilities, and Executive desires to be
employed by Company in such capacity, pursuant to the terms and conditions of
this Agreement.
NOW, THEREFORE, Executive and the Company hereby agree as follows:
1. Employment and Term.
1.1. Engagement; Term. The Company hereby agrees to employ
Executive, and Executive hereby agrees to serve the Company, on the terms and
conditions set forth herein for a term commencing on March 18, 1996 and
expiring on March 17, 1998, unless sooner terminated as provided in Section 1.2
(the "Term"). This agreement will be renewed on an annual basis for a new two
year term at the discretion of the Board.
1.2. Termination for Cause. The Company may terminate
Executive's employment hereunder prior to the expiration of the Agreement, the
term "cause" (as defined herein). For the purposes of this Agreement, the term
"cause" shall mean: (a) the willful failure by Executive to follow the
reasonable instructions of the Board of Directors or Chairman of the Company
after notice of such failure has been given to Executive by Company; (b) the
willful commission by Executive of acts that are dishonest and demonstrably
injurious to the Company, monetarily or otherwise; or (c) the commission by
Executive of an act punishable as a felony.
2. Position, Duties and Standards.
2.1. Position and Duties. Executive shall serve as the
President and Chief Executive Officer of the Company reporting to the Chairman.
Executive shall have such powers and duties as the Chairman and or Board of
Directors of the Company may reasonably prescribe from time to time, provided
that such duties shall be consistent with Executive's position as President and
CEO of the Company.
2.2. Standard of Services. While Executive remains in the
employ of the Company, Executive shall (a) devote his full business time and
energy to the business and affairs of the Company, (b) perform his duties
hereunder diligently and to the best of his ability, (c) use his best efforts,
skill and abilities to promote the Company's interest, and (d) perform all
duties that may be required of him by virtue of his position as the President
and Chief Executive Officer of the Company.
<PAGE> 2
3. Compensation and other Benefits.
3.1. Base Salary. The Company shall pay Executive a base
salary ("Base Salary") at the annual rate of $295,000 payable in substantially
equal installments in accordance with the Company's payroll policy for salaried
officers generally. The Executive's annual compensation shall be reviewed
annually by the Board and may be increased at its discretion.
3.2. Performance Bonus. Executive shall be eligible for bonus
payments in accordance with the Company's bonus policy for senior officers
generally, provided, that participation in any bonus payments under such policy
for the year ended December 31, 1996 shall be pro-rated based on Executive's
length of service during such year.
1. Senior Officer Bonus Plan - Based on 1996 Board approved
Budgeted Net Income Plan excluding Extra ordinary items.
2. 90% of Net Income = 2 1/2 of Salary Base
95% of Net Income = 12.5% of Salary Base
100% of Net Income = 25% of Salary Base
3.3. Stock Options. Pursuant to and subject to the terms and
conditions of the Company's 1990 Employee Stock Option Plan, as amended (the
"Plan"), Executive is hereby granted an option (the "Options") to purchase up
to 350,000 shares of Stock, at a price per share equal to the opening price of
the Stock on the NASDAQ system on the date of public announcement of
Executive's appointment as Chief Executive Officer of the Company. The Options
shall vest and become exercisable in accordance with the provisions of the Plan
and shall expire on March 17, 2001.
3.4. Vacation; Sick Pay; Holidays. Executive shall be
entitled to paid vacation in accordance with the Company's vacation policy for
officers generally. Executive shall also be entitled to all paid holidays
given the Company to its employees generally and a reasonable number of paid
sick days, as determined by the Chairman or the Board of Directors from time to
time.
3.5. Other Benefits. Executive shall be entitled to
participate in and receive benefits under any employee benefit plan or
arrangement that may be made available by the Company to its employees
generally, or to its senior executive officers as a group, subject to and on
the basis consistent with the terms, conditions and overall administration of
such plans or arrangements.
3.6. Relocation Expenses.
a. The Company shall reimburse Executive $2,000 per
month for 12 months for all expenses incurred by employee in relocating to
Louisville, Kentucky and for temporary housing in Louisville.
<PAGE> 3
3.7. Business Expenses. During the Term, the Company shall
promptly reimburse Executive for all reasonable expenses incurred by him in
performing the services required of him by this Agreement, provided that the
Executive properly accounts therefore in accordance with the Company's policy
as established by the Board for its senior executive officers or generally.
4. Confidentiality Covenant. During the Term and for three years
thereafter, Executive shall not disclose, without obtaining the prior consent
of the Board, to any person, other than employees of the Company or to a person
to whom disclosure is reasonably necessary or appropriate in connection with
the performance by Executive of his duties for the Company, any material,
confidential information obtained by him while in the employ of Company which
pertains to any of the Company's products, improvements, formulae, designs,
styles, processes, customers, methods of distribution or methods of production
or manufacture, the disclosure of which would be materially damaging to the
Company and which is not a matter of public knowledge (collectively,
"Confidential Information").
4.1. Covenant Not to Compete. You promise that, except as
otherwise approved in writing by the Corporation, you will not, during the term
of this Agreement and for a continuous uninterrupted period commencing upon the
expiration or termination of your employment with the Corporation, regardless
of the cause for termination, and continuing for a period of two years
thereafter, own, operate, engage in, be employed by or be a consultant to or
director of, or have any interest in, any business which is engaged in the
double drive-through or hamburger business.
5. Miscellaneous Provisions.
5.1. Notice. All notices, requests, demands and other
communications required or permitted to be given or made under this Agreement
shall be in writing and shall be deemed to have been given (a) on the date of
personal delivery or (b) provided such notice, request, demand or communication
is actually received by the party to which it is addressed in the ordinary
course of delivery, on the date of (i) deposit in the United States mail,
postage prepaid, by registered or certified mail, return receipt requested,
(ii) transmission by telegram, cable, telex or facsimile transmission, or (iii)
delivery to a nationally-recognized overnight courier service, if to the
Company, at its principal office in Louisville, Kentucky or, if to Executive,
at Executive current principal residence address in the Company employment
records pertaining to Executive.
5.2. Governing Law. The validity, interpretation and
construction this Agreement shall be governed by, and enforced in accordance
with, the laws of the Commonwealth of Kentucky.
5.3. Amendment and Modifications. No amendment or other
modification to this Agreement shall be binding upon any party unless executed
in writing by all parties hereto.
5.4. Waiver. No waiver by any party of any of the provisions
of this Agreement will be deemed, or will constitute, a waiver of any other
provision, whether similar, nor will any waiver constitute a continuing waiver.
No waiver will be binding unless executed in writing by the party making the
waiver.
5.5. Assignment. This Agreement is a contract for personal
services and Executive may not assign, by operation of law, merger or
otherwise, license, sublicense or otherwise transfer any of his rights or
obligations under this Agreement to any other person or entity without
obtaining the prior written consent of the Company.
<PAGE> 4
5.6. Entire Agreement. This Agreement constitutes the entire
Agreement between the parties concerning its subject matter. It supersedes all
prior or written or contemporaneous oral agreements, correspondence,
arrangements and understandings related to its subject matter.
5.7. Captions. All captions in this Agreement are intended
solely for the convenience of the parties, and none shall be deemed to affect
the meaning and construction of any provision hereof.
5.8. Cumulative Remedies. No right or remedy conferred upon
or reserved to any of the parties under the terms of this Agreement is intended
to be, nor shall it be deemed, exclusive of any other right or remedy provided
herein or by law or equity, but each shall be cumulative of every other right
or remedy.
IN WITNESS WHEREOF, the Company, by its duly authorized officer, and
Executive have executed and delivered this Agreement on the date first written
above.
RALLY'S HAMBURGERS, INC.
By: /s/ Burt Sugarman
---------------------
Burt Sugarman
Title: Chairman
------------------
(the "Company")
/s/ Donald E. Doyle
---------------------
Donald E. Doyle
("Executive")
<PAGE> 1
Exhibit 11
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
CALCULATIONS OF EARNINGS PER SHARE
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
---------------------------- ----------------------------
July 2, June 30, July 2, June 30,
1995 1996 1995 1996
------- -------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss) $(1,244) $ 111 $(4,753) $ 949
======= ======= ======= =======
Average shares of common stock and common
stock equivalents outstanding:
Average common shares outstanding 15,589 15,678 15,600 15,674
Common stock equivalents - dilutive
options - 256 - 128
------- ------- ------- -------
Average shares of common stock and common
stock equivalents outstanding 15,589 15,934 15,600 15,802
======= ======= ======= =======
Earnings (loss) per share:
Earnings (loss) before extraordinary
item $ (.08) $ .01 $ (.30) $ (.23)
Extraordinary item - - - .29
------- ------- ------- -------
Earnings (loss) per share $ (.08) $ .01 $ (.30) $ .06
======= ======= ======= =======
</TABLE>
27
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1996 AND THE CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 2,674
<SECURITIES> 0
<RECEIVABLES> 3,099<F1>
<ALLOWANCES> 0
<INVENTORY> 948
<CURRENT-ASSETS> 7,656
<PP&E> 73,354<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 114,927
<CURRENT-LIABILITIES> 27,036
<BONDS> 73,226
0
0
<COMMON> 1,594
<OTHER-SE> 6,055
<TOTAL-LIABILITY-AND-EQUITY> 114,927
<SALES> 86,279
<TOTAL-REVENUES> 89,269
<CGS> 30,865
<TOTAL-COSTS> 90,225
<OTHER-EXPENSES> 33
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,459
<INCOME-PRETAX> (5,069)
<INCOME-TAX> (1,496)
<INCOME-CONTINUING> (3,573)
<DISCONTINUED> 0
<EXTRAORDINARY> 4,522
<CHANGES> 0
<NET-INCOME> 949
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
<FN>
<F1>THE ASSET VALUES FOR RECEIVABLES AND PP&E REPRESENT NET AMOUNTS.
</FN>
</TABLE>
